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Where to?  During the last 45 days it appears everything is going wrong at once.  Commodities led by a record plunge in oil, have been crushed.  In equities, the FAANG complex is down about 25%.  Debt markets have been rattled by the turmoil engulfing GE and PG & E.  Goldman had its worst week since 2016.

By themselves, none of the above would be enough to incite panic but the issue at hand is every strategy appears to be failing at once, generating losses anywhere between 10% and 60%.  According to Bloomberg, in a little over a month the S & P 500 has fallen five days in a row three different times, the first time since at least 1984.  The NASDAQ 100 is at risk of dropping a record three straight months.

The risk of contagion is understood but what is not understood is where and how connected things are.  Just about anything can create a panic and it does not necessarily have to be something that makes sense.

In my view the global nervous system connecting modern markets, the synapses are misfiring.  However I think this is the result of the massive proliferation of indexing and passive investing.  This strategy requires no skill or analytical thought and the performance of the last five years border on the remarkable.

Indexes/passive investing are great at reducing costs by taking out industry mark ups until they become a significant portion of the market itself and then they pose a systemic risk.

I believe this is where we are today.  Unfortunately using history as a guide, a bottom will not be found until there is panic virtually everywhere.  Cracks today are now becoming fissures and a case can be made these fissures are edging closer to causing a collapse of the current market philosophies and trading patterns.

It is at this juncture the individual who has a macroeconomic and geopolitical thesis, one who poses forward looking thoughts backed by analytics will resurface and will mark the start of another era.

This is a holiday shortened week.  Data released before Thanksgiving include several housing statistics, manufacturing data and sentiment indicators.

Last night the foreign markets were up.  London was up 0.66%, Paris up 0.02% and Frankfurt down 0.19%.  China was up 0.91%,  Japan up 0.65% and Hang Sang up 0.72%.

The Dow should open moderately lower for a myriad of issues including trade, the arrest of Renault’s President, monetary angst and general evolving fear that nothing is acting as the financial alchemists had suggested. The 10-year is off 5/32 to yield 3.09%.

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Ken Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.